Wake Up and Smell the Economy: Tom Rathjen stands in front of the under-construction home of the first West Coast headquarters of the New York Stock Exchange. "Now we have to work at it," he acknowledges.

Wall Street West

With a new Peninsula-based headquarters, the New York Stock Exchange is determined to grab hold of the technological engine driving the nation's economy--even if it means wrenching it from Nasdaq's fists

By Loren Stein

TOM RATHJEN SURVEYS the flashy two-story glass-and-steel building at Page Mill Road and El Camino Real that will soon house the New York Stock Exchange's new West Coast headquarters and says with a grin, "I'm running a 208-year-old startup."

That may be a stretch, but certainly the venerable exchange has chosen its new location strategically and carefully--at what Rathjen calls "ground zero" of Silicon Valley. The 10,000-square-foot building is flanked by fast-growing biotech companies; it's a stone's throw from Wilson Sonsini, the valley's most powerful law firm, and only a short drive away from the venture capitalists of Sand Hill Road.

The new Palo Alto location will be the stock exchange's first permanent U.S. office outside of the East Coast. "This is a market that is pushing the envelope of technology worldwide," acknowledges Rathjen, who will head the new office and is vice president of the stock exchange's western region. "We're acknowledging that this area is of tremendous importance to the exchange. We realized that, to be more effective, we have to weave the New York Stock Exchange into the fabric of the West Coast in general and Silicon Valley in particular.

"For the first time," he notes, "we've decided to handle things locally."

THE STOCK EXCHANGE'S revelation is not news to many in Silicon Valley, and it's also considered to be long overdue. "It's a belated recognition of reality on their part," says Michael S. Malone, author and editor of locally based Forbes ASAP. "The de facto center of the American economy and economic growth has been Silicon Valley and the Bay Area for at least four years. It's pretty self-evident this is the place where most of the new wealth will be generated for the next 10 years." Adds Malone: "They'll have to fight hard to win here. It's not a matter of doing better. It's a matter of their survival."

Lew Platt, immediate past chairman and chief executive officer of Hewlett-Packard, agrees. "Their move here is significant because it says what we've known for a long time: The axis of economic power is shifting in the U.S. ... The U.S. economy is very technology-driven these days. It's highly visible, tangible proof that what's happening in Silicon Valley is very important."

Rathjen acknowledges that the East Coast exchange has a bit of catching up to do.

"Granted, we're going through a transition period," Rathjen says. "The exchange, in a sense, is re-inventing itself. Long gone are the days when companies would automatically list with the New York Stock Exchange. Now we have to work at it; we have to earn that business."

IN ATTEMPTING TO capture more high-tech business in Silicon Valley, the stock exchange will go head-to-head with its primary rival, Nasdaq, which has dominated the initial public offering market among valley startups. Many Silicon Valley powerhouses, such as Intel, Cisco Systems, Apple Computer, Sun Microsystems, Oracle and Applied Materials, listed with Nasdaq when they were fledgling startups and have remained loyal.

"Without Nasdaq, there would be no Silicon Valley," says Gary Burke, Nasdaq vice president and head of its decade-old Silicon Valley office.

Formed in 1971, Nasdaq allowed companies that were not yet profitable to list and trade stock as long as they fully disclosed the risks to the public. "The Apples and the Intels had huge needs for capital to build on their ideas," Burke recalls.

Burke declined to make any specific comments about the New York Stock Exchange's new Silicon Valley office and the competition between the two sales forces here. "To formulate new business and raise capital, you just have to be active in this location. Any business--stock exchange, venture capital or investment bank--interested in growth and the new economy certainly would want to have a presence here," he says.

Because the New York Stock Exchange has the steepest listing requirements in the world, it caters to a more exclusive club of older, well-established companies. It currently holds local companies Hewlett-Packard, Silicon Graphics, LSI Logic, Raychem, Seagate Technologies, Cypress Semiconductor and National Semiconductor.

Because of its $60 million net-worth requirements, among others, the exchange has missed out on the latest wave of startup technology businesses, especially the dotcoms. The exchange, however, can still try to steal the big, highly successful Silicon Valley companies that currently list with Nasdaq or compete for very large, profitable companies set to go public.

Rathjen may be uniquely qualified for the task: For three years, he worked as a senior director in Nasdaq's Menlo Park office before being recruited by the Big Board in 1998. He is the only NYSE employee ever hired from Nasdaq, he says.

In at least two recent cases, the stock exchange (housed for two years in a temporary office in Palo Alto and then Menlo Park) succeeded in snagging the IPOs of two local heavyweights after fierce, months-long competition with Nasdaq.

Biotech giant Genentech's July IPO was held at the company's headquarters in South San Francisco. Marking a first for the New York Stock Exchange, the opening bell was rung on a cable car and beamed to New York via satellite. Agilent Technologies, a Hewlett-Packard spinoff, celebrated its IPO on the floor of the exchange in November. Rathjen says his strong impression was that both companies were heavily leaning toward Nasdaq when the stock exchange first made its pitch.

"The playing field has been leveled to a large degree," Rathjen says. "I have great respect for Nasdaq, but I guess at times there is some animosity. They're going to battle hard, and we're going to battle hard. They'll win some, and we'll win some, and may the best market win." He adds, "I just want to eat their lunch."

IN SEPTEMBER, NYSE chairman and chief executive officer Richard Grasso told the Senate Banking Committee that trading markets are facing a profound shake-up as increased domestic and international competition, after-hours Internet trading and electronic communications networks threaten the old order.

What he didn't say is that the New York Stock Exchange, once the kingpin of securities trading, has the most to lose. As the oldest, largest and most prestigious equities market in the world, the exchange is home to 3,025 blue-chip and leading companies worth more than $16.8 trillion in global market capitalization and more than four times the market value of any other exchange.

The New York Stock Exchange traces its origins to 1792, when 24 prominent brokers and merchants gathered on Wall Street to sign the Buttonwood Agreement, which set up rules to trade securities and charge a uniform commission rate to customers. The pact laid the foundation for all U.S. stock trading and the development of modern American capitalism.

The exchange grew with the pillars of American industry--companies such as General Electric, Firestone, General Motors and Standard Oil. The Big Board's establishment image allowed it to trade on its prestige. In the eyes of some experts, however, that prestige caused it to take its eye off the ball, allowing upstart Nasdaq to take the lead by catering to the companies that are building the new economy.

For some 200 years, the ultimate badge of honor was listing on the New York Stock Exchange, says Malone of Forbes ASAP. "Now it's almost a badge of anachronism. The exchange doesn't get it. In their arrogance, they've always assumed they're the center of the economic universe. At times like these, being venerable is not an advantage, it's almost a handicap."

"The big new market capitalization is now built on technology, and Nasdaq courted them and grew up with them," agrees Michael Murphy, editor of The California Technology Stock Letter and a veteran analyst who's tracked Silicon Valley companies for 30 years. "The last time there was a flow of companies from Nasdaq to the [NYSE] Dow was in the 1987 crash. It would take another big down market for companies to consider moving over to the New York Stock Exchange again."

Adds Murphy: "There's no prestige to being on the New York Stock Exchange anymore. There's more prestige being on Nasdaq now."

"I think it's a little early to declare the game over," Lew Platt says. "The New York Stock Exchange is changing. But they're slow to change, there's no question about that."

AT THE SAME TIME they're opening their first West Coast headquarters, the New York Stock Exchange may borrow some of the valley's own tricks. Grasso announced in August that his board had given its approval to begin the radical process of taking the exchange public later this year. Transforming itself into a publicly traded, for-profit corporation could allow the exchange to find capital and adapt more quickly and competitively in an increasingly cutthroat environment.

If the stumbling blocks are worked out--and its 1,366 seat holders can be convinced to trade in their memberships for shares in the exchange--the New York Stock Exchange would be subject to the same opportunities and pressures as every other public company. Nasdaq and several European exchanges are likewise planning on going public.

According to published reports, the Big Board also is about to launch a national advertising campaign to portray itself as tech-savvy. For the Silicon Valley office, for example, it will spend millions of dollars on a high-tech, three-dimensional, real-time video feed of New York's trading floor that will help educate company officials about how the stock exchange works--and hopefully recast the exchange as a sophisticated user of technology. Satellite links will allow video-conferencing between executives in Palo Alto and New York. Rathjen in April will unveil the new headquarters and its revved-up gadgetry to the press.

"We need to reposition the NYSE so that people understand who we are these days, not who we were ten, twenty, thirty years ago," Rathjen says. "You see the New York trading floor every day on the news, and to the untrained eye, it looked as it did 80 years ago, an old archaic model. But we're much more modern and progressive than people think."

WHETHER THE NEW YORK Stock Exchange can succeed in Silicon Valley--and snag the big-fish companies from Nasdaq--is open to speculation. It will take more than jazzy high-tech tricks, namely speedy decision-making, faster reaction time and higher risks, says Lew Platt, who spent 40 years on the East Coast. "Companies in Silicon Valley will be looking at the stock exchange and asking, 'Are they responding to the need for change?' Making decisions quickly will be a very important test for them."

Assimilating into the local business culture will also be key. "They need to have a deep understanding of what's going on and be part of the network; they need to be bumping into people," Platt says. "I can't tell you the number of deals and strategic alliances that got started just because you ran into somebody and got talking about it."

Michael Murphy notes that California's business culture clashes with that of the East Coast. "The East Coast hierarchical model doesn't apply here," he says, noting there is a fine line between competition and cooperation. "Your customer is also your competitor, and your competitor is also your supplier."

Malone says the exchange will have to understand the unique needs of entrepreneurs. "In Silicon Valley, you need to identify who the players are and make relationships with them, not with the companies, because organizations are ephemeral. You need to connect with the talent." He adds: "It's all self-made money, there's not a lot of third-generation Rockefellers. It's about making money young and fast and doing it again and again."

Rathjen says that, as a Silicon Valley native who's never worked on Wall Street, he's well-versed in local business customs. Here, he says, the unwritten rules of business include strong partnerships, progressive thinking and never resting on your laurels. "We've been pretty low key, not banged the drum very loudly," he adds. "We want to show people what we've done, not just what we plan to do."

They have their work cut out for them, Malone says. "If they think they can storm into town with their big ship and their flags waving thinking that everyone will be dumbstruck with awe and the yokels will hand over their money, they're making a fatal mistake."

Even Rathjen agrees, up to a point. "There was a time when we said, 'By God, we're the Big Board, and we don't have to compete for business,' but those days are long gone. It's not the first time there's been a big shift in how we do business, and we've always been able to adapt. Those calling on our demise are misinformed, because it's just not going to happen."